Protecting Copyright and Innovation in a Post-Grokster World

S. HRG. 109–1041 PROTECTING COPYRIGHT AND INNOVATION IN A POST-GROKSTER WORLD

HEARING BEFORE THE COMMITTEE ON THE JUDICIARY UNITED STATES SENATE ONE HUNDRED NINTH CONGRESS

FIRST SESSION

SEPTEMBER 28, 2005

Serial No. J–109–40

Printed for the use of the Committee on the Judiciary

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VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC COMMITTEE ON THE JUDICIARY ARLEN SPECTER, Pennsylvania, Chairman ORRIN G. HATCH, Utah PATRICK J. LEAHY, Vermont CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts JON KYL, Arizona JOSEPH R. BIDEN, JR., Delaware MIKE DEWINE, Ohio HERBERT KOHL, Wisconsin JEFF SESSIONS, Alabama DIANNE FEINSTEIN, California LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin JOHN CORNYN, Texas CHARLES E. SCHUMER, New York SAM BROWNBACK, Kansas RICHARD J. DURBIN, Illinois TOM COBURN, Oklahoma DAVID BROG, Staff Director MICHAEL O’NEILL, Chief Counsel BRUCE A. COHEN, Democratic Chief Counsel and Staff Director

(II)

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC C O N T E N T S

STATEMENTS OF COMMITTEE MEMBERS

Page Cornyn, Hon. John, a U.S. Senator from the State of Texas ...... 4 prepared statement ...... 88 Feinstein, Hon. Dianne, a U.S. Senator from the State of California ...... 13 prepared statement ...... 90 Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont ...... 2 prepared statement ...... 93 Specter, Hon. Arlen, a U.S. Senator from the State of Pennsylvania ...... 1 WITNESSES Aydar, Ali, Chief Operating Officer, SNOCAP, Inc., San Francisco, California . 24 Lemley, Mark A., William H. Neukom Professor of Law, Stanford University Law School, and Director, Stanford Program in Law, Science and Tech- nology, Stanford, California ...... 22 Peters, Marybeth, Register of Copyrights, Library of Congress, U.S. Copyright Office, Washington, D.C...... 5 Roe, Marty, Lead Singer, Diamond Rio, Nashville, Tennessee ...... 16 Shapiro, Gary J., President and Chief Executive Officer, Consumer Elec- tronics Association, Arlington, Virginia ...... 20 Sherman, Cary, President, Recording Industry Association of America, Wash- ington, D.C...... 18 Yagan, Sam, President, MetaMachine, Inc., New York, New York ...... 25 Yang, Debra Wong, United States Attorney, Central District of California, and Chair, Attorney General’s Advisory Committee on Cyber/Intellectual Property, Los Angeles, California ...... 7 QUESTIONS AND ANSWERS Responses of Ali Aydar to questions submitted by Senator Specter ...... 33 Responses of Mark A. Lemley to questions submitted by Senators Specter, Leahy and Kennedy ...... 34 Responses of Marybeth Peters to questions submitted by Senators Specter and Leahy ...... 38 Responses of Gary Shapiro to questions submitted by Senator Specter ...... 46 Responses of Cary Sherman to questions submitted by Senator Specter and Leahy ...... 48 Responses of Sam Yagan to questions submitted by Senator Specter and Leahy ...... 53 Responses of Debra Wong Yang to questions submitted by Senator Specter and Leahy ...... 64 Questions submitted by Senator Leahy to Gary J. Shapiro (Note: Responses to the questions were not available at the time of printing.) ...... 77 SUBMISSIONS FOR THE RECORD Aydar, Ali, Chief Operating Officer, SNOCAP, Inc., San Francisco, California, statement ...... 78 Center for Democracy and Technology, Washington, D.C., statement ...... 83 Lemley, Mark A., William H. Neukom Professor of Law, Stanford University Law School, and Director, Stanford Program in Law, Science and Tech- nology, Stanford, California, statement ...... 95 Peters, Marybeth, Register of Copyrights, Library of Congress, U.S. Copyright Office, Washington, D.C., statement ...... 101 (III)

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC IV Page Roe, Marty, Lead Singer, Diamond Rio, Nashville, Tennessee, statement ...... 122 Scudieri, Scooter, Artist, Internet’s First Rock Star, Shepherds Town, West Virginia, statement ...... 125 Shapiro, Gary J., President and Chief Executive Officer, Consumer Elec- tronics Association, Arlington, Virginia, statement ...... 127 Sherman, Cary, President, Recording Industry Association of America, Wash- ington, D.C., statement ...... 141 Yagan, Sam, President, MetaMachine, Inc., New York, New York, statement . 147 Yang, Debra Wong, United States Attorney, Central District of California, and Chair, Attorney General’s Advisory Committee on Cyber/Intellectual Property, Los Angeles, California, statement ...... 157

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC PROTECTING COPYRIGHT AND INNOVATION IN A POST-GROKSTER WORLD

WEDNESDAY, SEPTEMBER 28, 2005

UNITED STATES SENATE, COMMITTEE ON THE JUDICIARY, Washington, DC. The Committee met, pursuant to notice, at 9:30 a.m., in room SD–226, Dirksen Senate Office Building, Hon. Arlen Specter, Chairman of the Committee, presiding. Present: Senators Specter, Cornyn, Leahy and Feinstein. OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S SENATOR FROM THE STATE OF PENNSYLVANIA Chairman SPECTER. With all this quiet in the Judiciary Com- mittee hearing room, without even the pounding of the gavel, it must signify that you are ready to begin this hearing. I haven’t heard such an orderly assemblage in the 25 years I have been here before the Chairman signifies the start, but you saw it was 9:30 and recognized that, by precedent, this hearing is underway. Our hearing today focuses on the recent Supreme Court decision in the case of MGM v. Grokster, and as articulated by the Court, the subject is the, quote, ‘‘tension between the competing values of supporting creativity through copyright protection and promoting technological innovation by limiting infringement liability.’’ The subject of copyright infringement and the promotion of creative and artistic endeavors was the focus of the Founding Fathers in Article 1, section 8, of the Constitution, where Congress was ex- plicitly granted the power to regulate copyrights and patents for the promotion of exclusive rights to authors’ creative activities on literary, dramatic, musical, artistic or intellectual works. The Congress has not acted on the issue of the Internet and copyright infringement and secondary liability, but has really left it up to the court, which, candidly, is a major concern of mine. Con- gress has much more capabilities to deal in this field than does the court. We have the capacity to hold hearings, to make fact-findings, to listen to the competing complex issues on all sides, contrasted with the more limited approach of the court in the judicial pro- ceedings. But so often, as is the case, the Congress abdicates or defers to the court. We had the hearings on Guantanamo several weeks ago where, notwithstanding the express Congressional responsibility, nothing was done and the court came down with a series of opinions in June of 2004 and we are really on the sidelines, although we ought to be front and center. (1)

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 2 So this is a very important hearing, and in the absence of a con- stitutional issue, which we really don’t have, Congress really ought to be making the judgment here. It goes without saying that we are very, very busy on many, many items. I don’t have to enumerate them for this erudite group, but that is not a sufficient explanation as to why we await the judicial decisions. I can recall back in the early 1980’s on the VCRs, before we had the decision in Sony v. Universal, giants of the industry on both sides were camping outside of all the Judiciary Committee doors. I had a small hideaway on the west wing and had the multi- zillionaires seated on the steps outside the hideaway. I am filibustering, Patrick. Senator LEAHY. I appreciate that. You know how. [Laughter.] Chairman SPECTER. Only in hearings, not in confirmation pro- ceedings. [Laughter.] Chairman SPECTER. Commenting back about the days of the Betamax, and I am sure you will remember how much in demand Judiciary Committee members were, with all the moguls of the industries competing. I had a small hideaway. Senator Leahy had a lot more seniority, so he was in some lofty perch somewhere. But they were sitting on the steps and I was a newly elected Senator and was sort of luxuriating in the power. All these big wheels were seated on the steps waiting to talk to me, and I didn’t know anything about this subject anyway. But we didn’t act at that time and the Supreme Court came down with the decision, and now we have in the Grokster case the finding of secondary liability where there is a distribution, quote, ‘‘with the objective for promoting its use to infringe copyright, as shown by the clear expression or other affirmative steps taken to foster infringement,’’ and that establishes the liability. But, as usual, the concurring opinions throw some doubt as to what the standards are. Justice Breyer’s definition of, quote, ‘‘substantial non-infringing uses,’’ close quote, is measured by using a prospective analysis of future non-infringing uses of the product rather than a pure comparison of current infringing and non-infringing uses. Justice Ginsburg has a narrower view, saying substantial would depend on the consideration of the actual relative uses to come to an estimate of the infringing and non-infringing uses of the product. I am hopeful that a new Chief Justice will stop the proliferation of concurring opinions so we have a better idea as to what the law is, but there is another illustration of the important role Congress could play. I limit my 5 minutes, Senator Leahy, to the time when you ar- rived. So the red light has been on, unusually, for a minute and 14 seconds, and now I yield to you.

STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE STATE OF VERMONT Senator LEAHY. Mr. Chairman, you can take all the time you want. You know that.

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 3 In talking about Betamax, I do recall that time, and Ms. Peters does very well, I am sure. She is our go-to expert up here. You know, there was so much of the debate that went on at that time. There was also the debate—and the Senator from Texas may recall reading about this, too—the movie industry was very upset about the ability to tape movies and said you have to do something to stop this kind of thing. Well, of course, there is not a single movie that is made today without planning what they can do—probably not so much VHS tapes anymore; it is all DVD—what can they do in after-sales. In fact, many movies that are kind of clunkers at the box office make more in DVDs. I made the mistake of renting one the other night. God, it stunk, and I won’t mention which one it was. Peer-to-peer technology, of course, revolutionized the way we share all sorts of information. But, like any technology, it can be abused, and unfortunately it has been. And as with any technology, those who abuse it effectively prevent the technology from reaching its highest potential. More than 5 years ago, we held our first hearing on peer-to-peer, beginning an important dialog with many of the people in the community about this. I have long been a champion of innovation. I have long deplored the fact that a few rogue peer-to-peer companies have hijacked the enormous potential of this technology. I have high hopes as someone who loves music, as someone who is fascinated by technology and as someone who represents a State full of music and technology fans, that the emerging market for legitimate online music sales will prosper. I hope it does so quickly. If you look in my library, it goes from Puccini to the Grateful Dead. It is eclectic in its ability to pick up anything I want anywhere. But my concern is that unless the problems of piracy and privacy are addressed, peer-to-peer will never realize its enormous potential to build online communities, to enhance network learn- ing, and to make unprecedented amounts of material, both educational and entertaining—it is not just entertaining, but it is the educational ones—available worldwide. I remain concerned about the privacy and security issues. Since the Supreme Court’s decision in the Grokster case, the industry players have certainly had incentive to find ways to provide online music without promoting the theft of music online. Last June, as the Chairman has mentioned, the Supreme Court unanimously held that someone who distributes a device for the purpose of promoting its use for infringing copyrights will be just as liable for the infringement as the third parties who do the actual, direct infringing. They emphasized that Grokster’s unlawful purpose was abundantly obvious. We should all remember that it is people using technology who infringe copyrights. Technology itself is not the problem, and nei- ther is technology alone the solution. Our goal has to be the responsible use of technology and the respectful treatment of intellectual property rights. Our technologies may evolve, but the central principle of respect for rights and promotion for innovation has to remain constant. The balance between these is critical to maintaining our Nation’s status as the world leader in intellectual property.

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 4 We have all heard a great deal about peer-to-peer networks. Now, we are hearing more about Web casting and satellite radio. We want consumers to enjoy the great diversity in music available. We just have to ensure they do it legally. So I thank the witnesses who are here to herald this beginning in the world of online music. The potential is fascinating. We are not Luddites on this Committee. We want it to expand, but we also—and I can’t emphasize enough I want to protect people’s legitimate rights. Those who produce the material and have done the work and the innovation, oftentimes genius, deserve to have their rights protected. [The prepared statement of Senator Leahy appears as a submission for the record.] Thank you, Mr. Chairman. Chairman SPECTER. Thank you very much, Senator Leahy. Senator Cornyn, would you care to make an opening comment? STATEMENT OF HON. JOHN CORNYN, A U.S. SENATOR FROM THE STATE OF TEXAS Senator CORNYN. Thank you, Mr. Chairman. I will be brief. I want to express my gratitude to you for scheduling this important hearing. Like the hearing that you held last week regarding the decision of the Supreme Court in Kelo v. City of New London, this hearing focuses on the important issue of property rights, only this time the property right doesn’t involve a home, but rather the property interests of artists and those who invested so much money to produce their artistic works so that we can all enjoy them. One of the good things about this hearing is I learned that Sen- ator Leahy, our distinguished Ranking Member, listens to the Grateful Dead. We learn more everyday about each other in this body. Senator LEAHY. I might say I think I know the lyrics of almost all of the songs, and I have got to tell you at some of the concerts the lyrics tended to change, depending upon the mood of the Dead. Senator CORNYN. I see the Ranking Member in a different light now than I did before. [Laughter.] Senator CORNYN. I appreciate him even more. Unfortunately, as you know, Mr. Chairman and Senator Leahy, everyday literally millions of dollars in copyrighted materials are stolen online. This theft is no less wrong because it happens in cyberspace. Rather, it is putting thousands of Americans out of work and damaging one of the most important and vibrant sectors of the United States economy. As the Court said in the Grokster case, because well over 100 million copies of the software in question are known to have been downloaded and billions of files are shared across networks each month, the probable scope of copyright infringement is staggering. Grokster and StreamCast are not, however, merely passive recipi- ents of information about infringing use. This is an issue that really we have addressed before, similar issues, on a bipartisan basis, and I am sure we will continue to do that in this difficult area to try to strike the right balance. Senator Feinstein and I were proud to cosponsor the Artists Rights and

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 5 Theft Prevention Act, which we passed in the 108th Congress, which had to do with piracy of films, movies and other copyrighted materials even before copyright owners have had the opportunity to market their products. With the help of Senators Hatch and Leahy, that bill became law earlier this year as part of the Family Entertainment and Copyright Act. I am also pleased to be working with Senator Leahy, our Ranking Member, and other colleagues on additional legislation that will protect against rampant counter- feiting. In closing, Mr. Chairman, let me just say that as we consider additional legislative measures and as we observe the implications of the Court’s ruling in MGM v. Grokster, we must ensure that the advent of the Internet and the expansion of innovative technologies do not set aside the basic principles that theft is wrong and that facilitation of theft is equally wrong. Thank you, Mr. Chairman. [The prepared statement of Senator Cornyn appears as a submission for the record.] Chairman SPECTER. Thank you very much, Senator Cornyn. We now turn to the United States Register of Copyrights, Marybeth Peters, who has held that position since 1994, and for 11 years prior was the policy planning adviser to the Register. So that is quite a distinguished tenure in that office. She has been a lecturer at Catholic University and an adjunct professor of copyright law at the University of Miami School of Law and Georgetown Law. He has her undergraduate degree from Rhode Island College and a law degree with honors from G.W. Thank you for joining us, Ms. Peters, and the floor is yours.

STATEMENT OF MARYBETH PETERS, REGISTER OF COPY- RIGHTS, LIBRARY OF CONGRESS, U.S. COPYRIGHT OFFICE, WASHINGTON, D.C. Ms. PETERS. Chairman Specter, Senator Leahy, members of the Committee, thank you for the opportunity to testify on protecting copyright and innovation in a post-Grokster world. The recent ruling in the Grokster case, one of the most significant developments in copyright law in the past 20 years, clarified that those who offer products and services in a way that induces others to engage in copyright infringement can be held secondarily liable for that infringement. That clarification appears to have encouraged productive negotiations and agreements within the music industry and ultimately should make it easier to legitimately obtain music online. The Grokster ruling has also raised the public consciousness as to the legal status of unauthorized peer-to-peer file-sharing of copyrighted works. In Grokster, the Court made clear that regardless of whether a product is capable of substantial, non-infringing use, one who offers such as product with an intent to induce to use it to infringe copyrights will be liable for the resulting infringement. As the Court put it, one who distributes a device with the objective of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for resulting acts of infringement by third parties. The

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 6 Court made this ruling in a specific factual and legal context that is worth noting. Ever since the rise of Napster in the late 1990s, creators and per- formers of music, motion pictures and other creative works have faced an unprecedented threat to their livelihoods as a series of so- called file-sharing services have risen to create and serve a market from massive copyright infringement. Millions and millions of people flocked to these peer-to-peer services to get free music, free movies and free other creative works, apparently without giving a thought to the fact that not only were they engaging in copyright infringement, but they were also undermining the very incentive for authors and artists to create the works that they were so eager to obtain. Grokster and StreamCast clearly knew what their services were being used for, and as the litigation revealed, they consciously set out to exploit the market for infringement and to promote the use of their software for that purpose. But they were able to assert a plausible legal defense by relying on the Sony case involving the sale of VCRs, which was decided long before the Internet made it possible to engage in massive, instantaneous and virtually cost-free infringement. In Sony, the Court held that there could be no liability for contributory infringement based solely on the distribution of a product that is capable of commercially significant non-infringing uses. The peer-to-peer services, supported by others in the consumer electronics and technology industries, asserted all the way to the Su- preme Court that because peer-to-peer software is capable of substantial non-infringing uses, and because even those particular peer-to-peer services could be used for the reproduction and distribution of works in the public domain or of copyrighted works with the permission of the copyright owner, they were shielded from liability under the Sony doctrine. If their arguments had prevailed, the continued existence of our creative industries, as well as our copyright law, would have faced a potentially mortal threat. Fortunately, the Court rejected such a drastic reading of Sony and made clear that whether or not a product has substantial non-infringing uses, one who distributes it with the intent that it be used to infringe and who takes steps to promote its use to infringe will be liable when infringement takes place. Last year, Senators Hatch and Leahy introduced the Induce Act which would have made it unlawful to intentionally induce an act of copyright infringement. The Supreme Court’s ruling comes close to accomplishing the intent of that Act. It may be that in a few years either copyright owners or technology providers, or both, will conclude that Grokster did not achieve the right balance or that further clarification of the Sony rule is necessary. But we need to give lower courts some time to digest this ruling and give the affected parties time to see how clearly it offers guidance for both copyright owners and technology providers, and how good that guidance turns out to be. At this time, it is premature to consider the need for any legislation on secondary liability.

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 7 You should, however, now reform Section 115 of the Copyright Act, the compulsory license for reproducing and distributing phonorecords of musical works. Grokster gives copyright owners and legitimate music services a useful tool in the fight against peer-to-peer piracy, but that battle will not be won unless consumers are able to find the music they want online from legitimate services that offer convenience, security and reasonable prices. Sec- tion 115 is out of date and little headway has been made during the past 2 years of discussions about reform. Legislative action is needed now. To conclude, first, I am hopeful that Grokster represents the turning point where legitimate online delivery services can sup- plant the illegal services that have dominated the online music scene. Second, I urge you to make reform of Section 115 of the copyright law a legislative priority for the 109th Congress, and I look forward to working with you to help that come about. Thank you. [The prepared statement of Ms. Peters appears as a submission for the record.] Chairman SPECTER. Thank you very much, Ms. Peters. Our next witness is the United States Attorney for the Central District of California, Debra Wong Yang, the first Asian-American woman to serve as a United States Attorney, and has the largest office outside of Washington, D.C. She was appointed by the Attor- ney General to Chair the Attorney General’s Advisory Committee on Cyber/Intellectual Property and the Intellectual Property Task Force. She had been a California State judge and an adjunct professor at USC. Her law degree is from Boston College. Thank you very much for coming in today, Ms. Yang, and we look forward to your testimony. STATEMENT OF HON. DEBRA WONG YANG, UNITED STATES AT- TORNEY, CENTRAL DISTRICT OF CALIFORNIA, AND CHAIR, ATTORNEY GENERAL’S ADVISORY COMMITTEE ON CYBER/ INTELLECTUAL PROPERTY, LOS ANGELES, CALIFORNIA Ms. YANG. Thank you, Chairman Specter, Ranking Member Leahy, Senator Feinstein, Senator Cornyn, Good morning. Thank you for the opportunity to discuss the Supreme Court’s recent decision in Grokster, and more broadly to talk about the Justice De- partment’s efforts in protecting intellectual property. Until relatively recently, protection of intellectual property has largely been a civil matter. Congress has made civil remedies available and left it to private parties to sue one another for damages or equitable relief. Grokster involves the reach of civil liability for copyright. There, the Court held that a person could be secondarily liable for a third person’s copyright infringement, but only if he acted with the intent to promote the unlawful infringement. What I would like to discuss, however, is what the Justice Department is doing to enforce the criminal laws protecting intellectual property. Congress has created criminal penalties only recently. Copyright and trademark infringement did not become felonies until the 1980s, and theft of trade secrets was not criminal until 1996. Pat- ent infringement to this day is protected only by civil liability. The

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 8 resort to criminal sanctions has paralleled the growing importance of intellectual property to our economy. In our mission to protect intellectual property, the Justice De- partment has focused on three goals. First, we have been using the tools that Congress has provided to halt the supply of illegally obtained intellectual property. Second, we have attempted to dimin- ish the demand for pirated and stolen intellectual property through educational and outreach programs. And, lastly, we have trained and rely upon a group of prosecutors who specialize in cyber and intellectual property crimes. In stemming the supply, we have investigated and prosecuted the initial theft of intellectual property assets, as well as their sub- sequent distribution. For example, we have identified three ways in which movies not yet available in DVD format are obtained. They are stolen from post-production facilities, they are handed off by persons who screen movies for the Academy Awards, or they are taped by camcorders. We have aggressively prosecuted criminals who engage in all of these acts. Just this year, Congress substantially aided our ability to stop the supply of so-called pre-release movies by elevating the acts of uploading and of camcording from misdemeanors to felonies. U.S. Attorneys’ offices across the Nation have already started to use these new statutes. We have also attacked the distribution networks used by those who steal and pirate intellectual property. For those who distribute using the Internet, we use the Digital Millennium Copyright Act to prosecute individuals who dismantle the copyright protection attached to intellectual property assets. We have also conducted several long-term investigations aimed at infiltrating and taking down groups that share pirated software and movies over the Internet. For example, earlier this year we had Operation Site Down. The Department of Justice took aim at a so-called warez group that operated a centralized data base con- taining more than $50 million in illegally copied intellectual property assets. We have also started to investigate and prosecute more decen- tralized pirating organizations that use the peer-to-peer networks to store and distribute illegally obtained intellectual property. I have outlined several of these examples in my written submission to this Committee. We have also targeted groups that distribute intellectual property in the real world by making hard copies of DVDs, CDs and software, and selling those items at swap meets and on street cor- ners across the United States. Last year, for instance, U.S. Attor- neys’ offices in California and the State of Washington completed Operation Marauder and charged 12 people with copyright and trademark violations based on their mass production and distribution of illegal software in several different States in one of the largest seizures of counterfeit software in United States history. In addition to these prosecutions, the Department has contrib- uted to the administration’s STOP program, which stands for Strategy Targeting Organized Piracy. Working with the White House, the Department of State and other departments within the Government, the Justice Department has met with representatives

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 9 from other countries to halt the influx of pirated items into the United States. In addition to working to halt the supply, we have also devoted substantial time and effort to diminishing the demand for pirated intellectual property. Over the past year, we have hosted several different outreach programs aimed at high school students to educate them about why they should not download illegally obtained music, games and movies. We will continue to work on changing the attitudes about piracy through our extensive educational efforts. The Department’s efforts in halting the supply and demand for illegally pirated goods have been aided in large part by the Depart- ment’s commitment to developing specialized prosecutors. The De- partment is now home to a 35-person attorney unit called the Com- puter Crime and Intellectual Property Section, known as CCIPS here at Main Justice, and have specialized units known as CHIP units, which stand for Computer Hacking and Intellectual Property units, that prosecute cyber and intellectual property crimes in 18 United States Attorneys’ offices, as well as one CHIP prosecutor in each of the remaining U.S. Attorneys’ offices. Last year, then-Attorney General Ashcroft commissioned an In- tellectual Property Task Force to conduct a comprehensive 6-month review of the Department’s efforts to protect intellectual property. In October of last year, the task force published its report, with several concrete proposals to increase the Department’s effective- ness in prosecuting these types of crimes. Attorney General Alberto Gonzales has reaffirmed the Depart- ment’s commitment to these issues when he recommissioned the task force to implement the recommendations. The Department has already put several of these recommendations into practice, which are set forth also in my written testimony. Finally, Attorney General Gonzales recently created a subcommittee of United States Attorneys to examine what the Depart- ment can do to improve its prosecutorial efforts in protecting intellectual property. I have been asked to chair this subcommittee. Our subcommittee is just beginning its work. I am grateful for the opportunity to address this cCommittee and I am hopeful that today marks the beginning of a fruitful dialog between our new Committee and Congress as to how to best combat the misuse of our Nation’s intellectual capital. Thank you, and I would welcome any questions. [The prepared statement of Ms. Yang appears as a submission for the record.] Chairman SPECTER. Thank you very much, Ms. Yang. Without objection, Senator Cornyn’s statement will be made a part of the record, as will all other statements submitted, including Senator Feinstein’s, Senator Leahy’s, mine, and all of the witnesses’. Their statements will be made a part of the record. Ms. Peters, you have been in the Register’s office now for some 22 years. We would be interested in your views as to whether the definition of secondary liability and interpretation of the copyright laws generally might better be the function of Congressional hearings and legislation than Supreme Court decisions. What do you think?

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Ms. PETERS. Having had a good Supreme Court decision recently— Chairman SPECTER. How do you tell whether it is good or not? Ms. PETERS. I know, I know. In this case, basically finding that there was liability was a good decision, and finding that those who consciously induce those others to infringe should be liable is a good result. Chairman SPECTER. OK, so it was a good decision. Could Con- gress give you a better one? You know, we don’t have concurring opinions when we legislate. Ms. PETERS. I know, and we actually favor one of the concurring opinions over the other. But as I mentioned, Senators Leahy and Hatch last year did introduce the Induce Act, and if you look at the provisions in their Act and you look at what the Supreme Court did, they are remarkably similar. Chairman SPECTER. So the Court just copied Justice Leahy and Justice Hatch? [Laughter.] Ms. PETERS. Well, in many ways it is—I will use the words ‘‘remarkably similar.’’ Chairman SPECTER. You know, they haven’t even been con- firmed. [Laughter.] Senator LEAHY. And probably never could be. Ms. PETERS. I still believe that the common law system of secondary liability, in general, has served copyright rather well. And it may be that legislation should be enacted, but my own pref- erence would be to see how courts deal with this at this point in time, and that could better inform any legislative fix because ultimately what you are looking at is the exact same thing that the Supreme Court did. Chairman SPECTER. Well, I can understand your saying we have a Supreme Court decision and let’s see how it works out now. But institutionally, isn’t it really more of a Congressional function than a judicial function? Ms. PETERS. I actually believe it is both. Because the Copyright Office is totally governed by— Chairman SPECTER. It is both, exactly the same, tied, not more one than the other? Ms. PETERS. Certainly, if there is legislation that is a clear intent of what the Constitution intended with regard to the Constitution gives the power to Congress to determine the scope of copyright protection. But that is not totally exclusive, and even when Con- gress acts, the courts in a common law system interpret that legislation. So it always is kind of back and forth between the Congress and the courts, each one basically supplementing the other in various situations. Chairman SPECTER. Ms. Yang, in terms of the volume of the piracy and the losses, how would you compare the copying of cassette tapes and movie tapes, which had been the principal lines of infringement in the past, with the infringement available now with the technological advances and specifically the Internet? Is it a great deal more now than before?

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Ms. YANG. I would say so, Senator. With respect to the volume, because of the availability and the access of sharing on an Internet site, a warez site or on a peer-to-peer level, it is astronomical as far as how much can get out there and how quickly it can be done. There is one small distinction, though. With respect to the hard goods, the one difference is you actually exchange cash. So there is somebody who is out there who is taking monies in when it comes to hard goods. It is much more difficult for us to quantify what that loss would be in sort of the peer-to-peer or the Internet situation. Chairman SPECTER. Ms. Yang, we have the concurring opinions which are present in the Grokster case. Would it be important for Congress to pick up at least the issues raised in those two concurring opinions and consider them and to legislate in that area so the district courts know what the law is and won’t go back and forth like a tennis ball between the concurring opinions? Ms. YANG. First, Senator, I would like to make the distinction that Grokster relates solely to civil liabilities and civil issues, and I am here to sort of address the criminal aspects. But anytime you have an opinion where there are, I guess, questions left for liti- gants and parties to have to muddle through, it is always helpful to have legislation in that regard, and especially in this particular area as we course through rapidly changing times. Chairman SPECTER. My red light went on in the middle of your answer, so I yield now to my distinguished colleague, Senator Leahy. Senator LEAHY. Thank you, Mr. Chairman. Ms. Wong Yang, I am glad to have you here. Ms. Peters, of course, probably has the record of having appeared before this Committee more than virtually anybody else and, of course, has testified on this subject before. Could I ask you—I understand the various parties in the music industry have been negotiating among themselves. Have you taken part in those discussions? Ms. PETERS. We took part in the summer of 2004 and reported to the House subcommittee on the results of those meetings. We certainly have been aware of the discussions between the private parties, and I did actually testify before the House and people com- mented on my remarks. At the moment, we have met with most of the players and they seem to be at an impasse, but the bottom line is, yes, we have been very actively involved. We don’t have a stake necessarily in a particular outcome. The goal is to make sure that there is sufficient licensing so that legitimate services can blossom and flourish. Senator LEAHY. What happens if we don’t legislate a change in Section 115? Ms. PETERS. Then you have the status quo. So to the extent that there are people who are complaining that it is impossible to use the compulsory license or that it is impossible to license in the current environment, then that will continue. Senator LEAHY. What about those millions of people who have still got that old software? There are millions of people out there with the old software. They are still exchanging stuff. What do you do about that?

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Ms. PETERS. I think that the Supreme Court— Senator LEAHY. Is that horse out of the barn? Ms. PETERS. There will always be people who disobey the law. I do believe that because of the Supreme Court decision, more people know that there is no question about the legality of the various actions. So I do think those people who may have been tricked into thinking that what they were doing was legal know better. So I think ultimately it will be reduced, but it will never go away. Senator LEAHY. Thank you. Ms. Wong Yang, Senator Hatch and I introduced the Pirate Act last year. That is sort of the civil side of the Justice Department’s criminal enforcement authority in the copyright realm. Now, as I understand it, the Department did not support the effort of Senator Hatch and myself. You have also suggested very strongly that you believe the enforcement of intellectual property rights in a civil context has to be left to private parties. I am somewhat puzzled by this because the Federal Government, especially this Justice De- partment, has no hesitation in bringing civil cases in a lot of other areas where they assume the public interest requires it. Is there any reason why we should limit the Federal law enforcement of copyright laws just to the most egregious criminal cases? Couldn’t civil litigation accomplish sometimes quicker and better what you might want to do? Ms. YANG. Certainly, Senator Leahy, I think that where you have parties who can seek civil liabilities against each other, that provides a certain amount of compensation for the loss. What we try to do with our limited resources is try to attack those who actually distribute or supply to a greater magnitude and try to use our efforts to focus on, much as we do in drug cases, those that are sort of in the chain and distributing it. We can’t necessarily get at all aspects of it and try to sort of focus our efforts in that regard. Senator LEAHY. I can never fully understand just why the Justice Department does some things they do. I know right after 9/11, a lot of us were concerned about ships coming into the New Orleans port and the Department of Justice spent a lot of money on a huge investigation down in New Orleans, and guess what they found. Two houses of prostitution. I mean, who knew in New Orleans, of all places? [Laughter.] Senator LEAHY. I would think they could have gone to the Yellow Pages and found them a lot faster. [Laughter.] Senator LEAHY. How does the Department combat physical piracy? How is it handling the problem overseas? What resources are allocated to peer-to-peer prosecutions and how successful have those prosecutions been? Ms. YANG. Aside from the STOP program that I referred to earlier, the Department actually in the Intellectual Property Task Force report identified a number of things that we could do in the future with respect to dealing with some of the foreign problems. One of them is to put a prosecutor located in Eastern Europe and another one in Asia to help facilitate the processing of more of those crimes, and we continue to do outreach through various organizations into those countries.

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Senator LEAHY. Thank you. I think I will have some follow-up questions. I will submit them in writing, though, on that. Thank you very much, Ms. Wong Yang. Thank you, Ms. Peters. Mr. Yang. Thank you, Senator. Chairman SPECTER. Thank you, Senator Leahy. Senator Feinstein.

STATEMENT OF HON. DIANNE FEINSTEIN, A U.S. SENATOR FROM THE STATE OF CALIFORNIA Senator FEINSTEIN. Thank you very much, Mr. Chairman. As you probably know, this is a major issue for my State. We have all seven of the big movie companies, hundreds of independents, a whole chain of companies that function legally. I have watched for over half a decade now, beginning with Jack Valenti coming before this Committee and urging us to do something. We then asked Jack to go out and negotiate and there was an attempt at negotiation, and then there was another attempt at negotiation. Some companies, I believe, have changed. We now have a unanimous Supreme Court decision, and yet the peer-to-peer networks are apparently increasing rather than de- creasing. To me, that is a signal, and the signal is that we should enact a strong law to protect our copyright industries. If these negotiations can’t produce, then I think it is up to the Congress to act. I know that the United States Attorney here, Ms. Yang, operates the largest U.S. Attorney office in the Nation in the center of much of the intellectual property industries of California. If we were to legislate, Ms. Yang, what would you advise us to do? Ms. YANG. Senator, I can’t answer that specifically today. I will tell you that the legislation that you have provided to us in the past with the Family Entertainment and Copyright Act we have been using in the U.S. Attorneys’ offices. One case was filed—actually, all of them have been filed in your jurisdiction. One was filed in San Jose, and just yesterday down in Los Angeles we filed a case charging eight individuals using that violation where they uploaded onto the Internet. On the subcommittee that I just got named to chair, what we hope to do is identify various holes and places where we see things in our prosecutions that we could identify as being areas where we could use the assistance from this Committee and from the Senate. Senator FEINSTEIN. Well, you see, I would think in view of a unanimous U.S. Supreme Court decision, which is actually being followed in other countries—and we are constantly told stop to piracy in China. Well, how can you stop piracy in China when we can’t stop it in our own country? We have got that Supreme Court decision and still the illegality exists. I think what is necessary is really forceful enforcement tools. If you don’t have them, I think we ought to give them to you. Ms. YANG. Right. I mean, for example, when you increased the penalties in camcording from misdemeanors and allowed us to charge it as a felony, I think that sent a strong deterrent message through the entertainment—

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Senator FEINSTEIN. Then why are these illegal networks still out there if the message is so strong? Ms. YANG. I think the message needs to come out even stronger. We need to get out there with a unified voice. From the Depart- ment’s perspective, that is what we tried to identify through the In- tellectual Property Task Force and identify areas that we could hit on. We have been charging cases in the peer-to-peer area, but quite frankly there is only so much that we can do in a limited amount of time. Senator FEINSTEIN. My point is, Mr. Chairman, whatever it is, it is not enough. How can you have a U.S. Supreme Court opinion which is unanimous which carries the full force of the legal system in this country and yet it still goes on, and it goes on to the extent of considerable loss to legitimate companies with copyright rights? So my view is that whatever the message that is going out there is, it isn’t strong enough and that this Congress needs to take some action. I remember when Valenti first came before us and they started the negotiations, and it has gone on and on and on probably for close to a decade now. Yet, still the illegal market is increasing, and there seems to be no sanction and no deterrent that slows it down sufficiently. Chairman SPECTER. Well, we have the United States Attorney here from the Central District of California. Senator FEINSTEIN. Who is saying she does what she can when she can do it. That is the way I interpret what you are saying, and what I am saying back is it isn’t enough. So what do we need to do to give you the tools? That is what I want to know, if you don’t have the tools. Ms. YANG. Senator, I would actually like to—I don’t want to speak off the cuff here. I would like to sort of caucus with people back at Main Justice and see if there are things that we can identify or make specific suggestions to you, because I know that is what you are asking for. I will tell you that the education that we have been doing is a large component, and it is very dismaying for me to go into the public among high school students, college students, some of the places where I lecture to students, and ask them how many of you download music or movies. I give them a 10-second immunity to answer the question and almost always it is a hundred percent of the people in the room. So I mean that is part of the reason why we also have to educate our youth as to why this is actually a theft. Senator FEINSTEIN. Just bottom line, we either have copyright that we enforce, or because you have got this broad young public that sees nothing wrong with illegal downloading, you destroy every copyright industry, it seems to me. Every industry that de- pends on copyright can’t function in a country as the high-tech services become such that you can’t protect copyright. And that is what I see happening now, and it will spread to other areas, as well. So somehow we either get a handle on it and stop it—and I think the only way to stop it is through the peer-to-peer network by really sanctioning it in a way that either it is going to be legal or it isn’t going to exist.

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 15 That is the difficult part. How do we give you the tools to do that, because the market is going to remain, just as the market for illegal products in China and all over the world is going to remain? And it seems to me if we can’t stop it on our own shores, we can’t tell other countries what to do or not do. Ms. YANG. I agree. Chairman SPECTER. Well, Ms. Yang, aren’t there existing criminal penalties available to go after those who are secondarily liable? Ms. YANG. There are. I mean, post-Grokster, we did one case where we took down some peer-to-peer individuals and we continue to do that. It is just that for us— Chairman SPECTER. One case? Ms. YANG. Yes, we have done one case. Chairman SPECTER. How about more than one case? Ms. YANG. Well, part of that, sir, has to do with the fact that our mind set really is—and it is not to say that we ignore that. That is not it at all, but our mind set is trying to get at the people who directly distribute and supply the goods. So we are still going at sort of, as you call it, the first level. So for us to drop down to those who are, as we call it, secondarily liable—you know, it falls within the focus if it is of great magnitude, but quite frankly we are still operating at the first level. Senator FEINSTEIN. I think— Chairman SPECTER. Well, wait a minute. Why not operate at both levels? How much consultation is necessary with Main Jus- tice? You have criminal liability under the statute. You have a definition now by the Supreme Court as to secondary liability. Why not get tough? That is what Senator Feinstein wants you to do and I think she has got a pretty good idea. Ms. YANG. I could do that if I could take, for example, many more prosecutors and put them toward doing that. Chairman SPECTER. So you need many more prosecutors? Tell us what you need. That is the pending question by Senator Feinstein. Ms. YANG. Quite frankly, you know, the things where there are resources involved, that would definitely help because, you know, we are trying to manage, quite frankly, a lot of different things right now. Terrorism is our Number one priority, as well it should be, and unfortunately we have those kinds of cases that actively go on in my district. Chairman SPECTER. Is there any room for private prosecution of the injured parties to go into criminal court? Ms. YANG. Certainly, there could be cross-overs. I mean, we would never want to be sort of, I guess, the hammer in a civil lawsuit, so to speak. So where civil remedies are available and they are adequate, that is fine. Chairman SPECTER. I am not thinking about civil liability. There are some provisions in the criminal law for private prosecution. There was a very good analysis of that in the Yale Law Review some years ago that I wrote. [Laughter.] Chairman SPECTER. Senator Feinstein. Senator FEINSTEIN. If I might just say something, the thing that worries me is if we go out and arrest some high school that is downloading—and I don’t think any of us are supportive of that,

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 16 but you have got very smart, very sophisticated people running these networks. They know what the liability is and they take the chance, and I think, candidly speaking, it has got to be either made legal or shut down. What bothers me is the information I have received that it is increasing, despite the Supreme Court decision, which indicates to me that we have got a real problem on our hands and that if we don’t stop it, it is going to destroy these intellectual property industries. Chairman SPECTER. Well, you have your assignment, Ms. Yang: off to Main Justice and report back this afternoon. [Laughter.] Chairman SPECTER. Ms. Peters, we could use some help from you, too. With your 22 years’ experience, you must have some ideas. Consider the question to be submitted in writing within a week: what active steps can Congress take to help law enforcement with additional resources and what additional legislation is necessary, if any, to enforce the laws. Now, on to panel two. Our second panel consists of Mr. Marty Roe, Mr. Cary Sherman, Mr. Gary Shapiro, Mr. Mark Lemley, Mr. Ali Aydar and Mr. Sam Yagan. Marty Roe is our first witness on panel two. He is the lead singer and guitarist for the country music group Diamond Rio. No. 1 hits include ‘‘Meet in the Middle,’’ ‘‘Beautiful Mess,’’ ‘‘One More Day,’’ and ‘‘How Your Love Makes Me Feel.’’ The band has won four country music awards and was inducted into the Grand Ole Opry in 1998. Thank you for joining us, Mr. Roe, and the floor is yours. STATEMENT OF MARTY ROE, LEAD SINGER, DIAMOND RIO, NASHVILLE, TENNESSEE Mr. ROE. Thank you, Mr. Chairman, Senator Leahy and Mem- bers of the Committee. Good morning. I am Marty Roe, with the group Diamond Rio. I would like to introduce my band mates who are here somewhere: Gene Johnson, who is from Pennsylvania; Dan Truman, from Utah; and Dana Williams, who is from Ten- nessee. Somehow or another, they elected me for this honor. We do appreciate the opportunity to speak today to give you an artist’s perspective on the Supreme Court’s recent Grokster decision. We have been signed to Arista Records since 1991 and are blessed to have a career that has spanned well over a decade. I am proud to say that we made history this year with our 15th consecu- tive Country Music Association Vocal Group of the Year nomination, and I am proud and honored to be here this morning rep- resenting the music community. Imagine going to your job 8 hours a day, 5 days a week, 50 weeks a year, working hard to produce a product that you are proud of that adds value to society. Now, imagine that at the end of that year, you receive no paycheck and no compensation from the millions of people who use everyday that product that you worked so hard to create. You would have walked off that job long ago. Unfortunately, that is exactly what has happened in the music industry, not because of any lack of love for music, but for the simple truth that artists and songwriters, like everyone, need to make

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 17 a living. Many peer-to-peer services like Grokster have been the main culprit in preventing those artists from making a living. By operating file-sharing networks, encouraging and facilitating the free exchange of millions of copyrighted works, these businesses have devalued our music and created an entire generation of lis- teners who believe that we don’t deserve to be paid for our hard work and creativity. The result can be seen from Music Row to Hollywood as artists, musicians and songwriters have closed up shop. Some have estimated that the Nashville community has lost nearly half of its songwriters, a huge number of whom have been forced to go into other professions in this terrain. The Supreme Court’s decision in Grokster offered a unique high note in this otherwise downbeat time. The highest court in the land, in a unanimous decision, saw what we saw, what nearly everyone who seriously considered this issue saw: this was outright theft, and Grokster and other services like it were making it happen. The decision gives new hope to a suffering industry by making those services responsible for promoting the theft of our creative work. It shines a spotlight on shady businesses that have perfected the art of operating in the shadows and blaming others for the resulting illegal activity. Certainly, some bands have used peer-to-peer networks to market themselves and reach a wider audience. If this has worked for them, that is great, but this promotional device should be a choice for each and every artist. No one should decide for me or any other band that a song should be offered for free. Of course, Diamond Rio is excited to be a part of the digital revolution. We embrace it. For instance, our music is offered on the current Napster, iTunes, Music Match and many more, but these services present a major distinction from Grokster and its siblings. They value our music and encourage others to value it as well. For a reasonable fee, the public can get quality downloads without the threat of viruses and spyware. Appropriate payment goes to us and the many people who help us bring our music to you. The Grokster decision is important in helping to continue to usher in legitimate online music businesses and a vibrant, legitimate marketplace. We are part of a large family, an interconnected network of artists, songwriters, musicians, recording engineers and many others who bring music to life. We have been proud to work in Nashville, the heart of music-making in the country, and indeed in the world. We want to see this family survive and grow, and the Grokster decision has played a major part in that. The Grokster decision was helpful because a unanimous Supreme Court set the tone of intolerance for using piracy as a business tool to make profits at the expense of artists. Regardless of the medium, whether it be peer-to-peer, radio, downloads, satellite, Internet or any other platform, we hope that Congress will work vigilantly to maintain and assure this tone of intolerance against businesses facilitating theft, because by doing so you will be helping those of us who devote our whole lives to making the music. Thank you.

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 18 [The prepared statement of Mr. Roe appears as a submission for the record.] Chairman SPECTER. Thank you very much, Mr. Roe. Our next witness is Mr. Cary Sherman, President of the Record- ing Industry Association of America, 350 members. It purportedly represents the interests of a $14 billion U.S. sound recording industry. Prior to his current position, he was a partner in Arnold and Porter, and a graduate of Cornell and the Harvard Law School. Thank you for coming in today, Mr. Sherman, and we look forward to your testimony.

STATEMENT OF CARY SHERMAN, PRESIDENT, RECORDING INDUSTRY ASSOCIATION OF AMERICA, WASHINGTON, D.C. Mr. SHERMAN. Thank you, Mr. Chairman and Senator Leahy and Senator Feinstein. I appreciate the opportunity to testify today. I think that that must be an old bio because a $14 billion is now a $12 billion industry partly because of the subject matter of today’s hearing. Clearly, the decision in Grokster was a defining moment for the distribution of music and other creative content in the digital age. In a rare unanimous decision, the Court recognized that those who actively induce or encourage others to steal copyrighted works may be held liable themselves for the resulting infringement. And I would like to recognize this Committee’s leadership in helping forge the path taken by the Supreme Court in the Grokster case. The language of the opinion may be legalese to many, but the message was simple: theft in any medium is unacceptable and those who facilitate it may be held responsible. The music industry has been hit particularly hard by the massive theft occurring on illicit P2P file-sharing networks like Grokster. Record companies are essentially venture capitalists, with the revenue we earn from the sale of recorded music plowed back into new music and new artists. Unfortunately, there is a lot less money to invest these days. SoundScan recently reported that through the week of September of this year, album sales are down 8 1/2 percent versus the same period for 2004, and this is on top of a 5-year decline of some 30 percent on units shipped between 1999 and 2004. The result is less money to invest in new artists and new music. Thousands of individuals engaged in the music, film and other entertainment industries have seen their jobs disappear, and music stores across the country have had to close their doors. Left un- checked, the networks that promoted this illicit activity threaten to instill in an entire generation a culture of lawlessness and a com- plete lack of respect for copyright and the valuable works it pro- tects. The decision in Grokster helps to change all that, clarifying that inducing and encouraging infringement are just as much a part of copyright law as the doctrines of contributory infringement and vi- carious liability. This result is completely consistent with and does nothing to change the holding of the landmark Sony Betamax case, which the Court noted was never meant to foreclose rules of fault- based liability derived from the common law.

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 19 Simply, courts are not required to ignore evidence of intent if there is such evidence, and there was plenty of evidence of what Grokster intended. As the Court noted, the unlawful objective is unmistakable. The Supreme Court injected into copyright law some common sense based on centuries of common law. The Court was also careful to balance the interests of content innovators and technology innovators. By focusing on the behavior of Grokster and similar companies and not the technology they used, the Court separated the good actors from the bad and left in- tact the Sony Betamax standard that has served creators, technology developers and consumers so well. The clarity provided by the Court, rather than stifle innovation, will increase it. Companies like iMesh, SNOCAP, Mashboxx, Pier Impact and P2P Revolution, as well as new technologies that operate within the law, will have a chance to gain traction, attract in- vestors and appeal to fans. Within days of the decision, venture capital firms were calling companies offering licensed P2P services, looking for opportunities to invest. The Grokster decision ensures the healthy growth of a legitimate market eagerly seeking support. Apple’s iTunes, Real Net- works’ Rhapsody, Napster, Ruckus, Cdigix. Walmart, Yahoo and many others have worked hard to build successful destinations for legitimate online music. The growing interest in these services can be clearly seen on the campuses of colleges and universities across the country. Nearly 70 schools now have deals with a legitimate service—a more than threefold increase from just last year. The decision in Grokster has played a major role in this growing trend, focusing attention on the issue of illegal file-sharing and providing school administrators with undeniable moral and legal clarity. In fact, it has provided everyone with clarity. Those who make the movies, music, software and other creative content we love now know that their hard work will be protected. Consumers can now look forward to more of these great works and know that they can get them in a safe, secure, respectful and legal way. Those who seek to bring us content in fresh and innovative ways on new and old distribution platforms now know that they don’t have to compete with illicit free-riders offering the same content for free. Those who seek to support these exciting, new legitimate products and services can now have renewed faith in their investment. And those who have promoted the absurd notion that somehow it is OK to take someone else’s property just because you can have been shown to be clearly wrong. And those who choose to continue their businesses with a model based on theft now know that there is no excuse. The time to go legit is now. Thank you. [The prepared statement of Mr. Sherman appears as a submission for the record.] Chairman SPECTER. Thank you very much, Mr. Sherman. Our next witness is Mr. Gary Shapiro, President and CEO of the Consumer Electronics Association and Chairman of the Home Re- cording Rights Coalition. He led the manufacturers’ legal and legislative battle to preserve the legality of the recording technology and consumer battle to protect fair use rights. He had been associ-

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 20 ated with the Squires Sanders law firm, a Phi Beta Kappa from the State University of New York and a law degree from Georgetown. The floor is yours, Mr. Shapiro. STATEMENT OF GARY J. SHAPIRO, PRESIDENT AND CHIEF EX- ECUTIVE OFFICER, CONSUMER ELECTRONICS ASSOCIA- TION, ARLINGTON, VIRGINIA Mr. SHAPIRO. Thank you very much, Mr. Chairman, Senator Leahy, Senator Feinstein. The Consumer Electronics Association actually started in 1924 as the Radio Manufacturers Association, and now we have grown to some 2,000 companies, technology companies which employ hundreds of thousands of Americans, over $120 billion in sales, and are actually leading the economy and pulling it along through new technologies, many of which are giving different ways for the content community to reach their consumers. I am also here as Chairman of the Home Recording Rights Coali- tion, which as formed in 1981, the day after the Ninth Circuit Court of Appeals ruled that motion picture companies had the right to keep VCRs off the marketplace, which you were referring to earlier. While the Supreme Court in the Betamax case sparked a phe- nomenal technological renaissance of creativity and innovation that empowered consumers and created vast new markets for content providers, today in the post-Grokster world we are concerned that technological creativity and innovation may be stifled by the fear of future litigation and over-regulation. The Grokster Supreme Court did not overturn Betamax, but created a new template, an inducement doctrine based on subjective intent. We are concerned about the future interpretation of this doctrine in the lower courts, especially in an environment where the media companies have expanding legal tools to limit the lawful activities of consumers, manufacturers and retailers. Now, on any typical day the wired family sends news to friends over the Internet, rips songs from CDs to portable players, downloads information from the Web to be used in school and business reports, and copies information from home repair, cooking or shopping websites. Teenagers take images and sounds and text and weave them together in unpredictably creative and very innovative ways. This use of technology to shift content in time, place, form and structure is redefining our culture and it is spurring new forms of creativity. Yet, all of these increasingly commonplace activities involve conduct that an overly broad interpretation of the Grokster case could prohibit. We are at a crossroads today as we shift to a digital society. With new technologies allowing every citizen to be a creator, our na- tional creativity can no longer be measured by CD sales. With photo, video and music studios shifting to the American home, with the Internet providing worldwide outlets for distribution, with new technologies leaping forward, now is not the time to chill American ingenuity. And yet Grokster has certainly created that chill. Before developing a product in the post-Grokster environment, an innovator or entrepreneur will have to persuade everyone, from its

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 21 outsider bankers to its inside counsel, that the product can be sold without risk of a lawsuit. Venture capital migrates away from risky, litigation-prone areas. So the chilling effect of content industry lawsuits against entrepreneurs is not even an academic exer- cise at this point. Consider the company Replay. That was a competitor to Tivo in the personal video recording market. It was driven to bankruptcy by litigation brought by MPAA members. Among the claims in the complaint they filed was that Replay, which is almost just like Tivo, induced the reproduction of copyright material. Well, one of today’s hottest new products brought by a tiny company is the sling box. It is an ingenious new product that lets you watch a television signal from your home, cable or satellite TV service on a laptop computer, no matter where you are. There is no infringement here. No copies are being made and you can only connect to one device at a time. Yet, according to published reports, the MPAA has already threatened the company with a lawsuit to stop the sale of the product. Now, driving our concern as a technology industry is the fact that over the last decade, copyright law that this Congress and pre- vious Congresses have passed has repeatedly been changed to strengthen the rights of copyright owners, while narrowing the rights of consumers and technology entrepreneurs. Terms of copyright are much longer. Penalties for infringement are much harsh- er. The DMCA made it illegal to create, or arguably even to discuss technologies which circumvent a copyright protection scheme. Now, individually, each of these Acts passed by Congress seems justifiable. But, cumulatively, they have totally tilted the balance toward copyright owners and away from users and technology companies. These new powers, fortified by the Grokster decision, make it easier for content owners to bottleneck innovation to the narrow paths approved by copyright owners. Indeed, just last week the motion picture industry announced that it is forming an exclusive consortium called MovieLabs to examine and license approved copy protection technologies. Central- izing licensing in a body owned and controlled solely by the movie industry is a powerful weapon in the wake of Grokster. Sheer market power of these six studios should be of interest to this Com- mittee and to the Department of Justice. Despite winning the Grokster case, the content community is seeking even more legislative tools. Right now, the recording industry is approaching another Senate Committee with a proposal to give the FCC broad power to impose design requirements on new digital radios. And unlike the TV broadcast flag, the RIAA is not aimed at mass, indiscriminate, anonymous distribution of content over the Internet. The RIAA digital radio proposal is aimed square- ly at limiting non-commercial recording entirely by a consumer in a private home. It would work an enormous change to copyright law and fair use. Yet, this proposal has never even been put to this Committee or to Congress. We do not believe that this is the time to hand new weapons to copyright proprietors to use against new technologies and inventors and entrepreneurs. But if the content community insists that they need further protections under the law, then we ask at a minimum

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 22 that a clear statement of manufacturer and consumer protections be part of the equation. That is why in the House we support H.R. 1201, which would provide a clear statement by codifying the Betamax doctrine. Thank you. [The prepared statement of Mr. Shapiro appears as a submission for the record.] Chairman SPECTER. Thank you, Mr. Shapiro. We now turn to Professor Mark Lemley, Neukom Professor of Law at Stanford, and director of the Program at Stanford in Law, Science and Tech- nology. He is the author of 6 books and 65 articles, has a law degree from Boalt Hall and a bachelor’s degree from Stanford Univer- sity. He is one of the top intellectual property lawyers in Cali- fornia. Thank you for coming in today, Professor Lemley, and the floor is yours. STATEMENT OF MARK A. LEMLEY, WILLIAM H. NEUKOM PRO- FESSOR OF LAW, STANFORD UNIVERSITY LAW SCHOOL, AND DIRECTOR, STANFORD PROGRAM IN LAW, SCIENCE AND TECHNOLOGY, STANFORD, CALIFORNIA Mr. LEMLEY. Thank you, Mr. Chairman. I want to start by saying that I am encouraged at the title of this hearing, which is ‘‘Pro- tecting Copyright and Innovation in a Post-Grokster World,’’ because the message I want to bring to you is that both protecting copyright and protecting innovation are extraordinarily important. Copyright is good because it encourages creativity. Innovation is good because it encourages a variety of other activities, and indeed facilitates the use and distribution of copyrighted works. The important thing is not to promote one at the expense of the other, but instead to try to find a balance. Now, the problem is that there are abuses. There are, as has been mentioned in this Committee already, undoubtedly abuses of copyright by high school and college students, as Senator Feinstein mentioned, who are downloading or uploading without authoriza- tion. That is illegal and it should be illegal. There are abuses by technology companies in rare cases such as Napster, designed solely to facilitate those acts of infringement. But I want to make it clear that there are also abuses of copyright law by copyright owners who are asserting rights designed to go after the people who are infringing instead of against legitimate technology companies. This isn’t a ‘‘may happen’’; this is an ‘‘is happening.’’ We have seen lawsuits filed by copyright owners against the makers of consumer electronics devices that play music, against the makers of consumer electronics devices that allow you to record off of the television, against Internet auction sites like eBay, against Internet service providers, against search engines like Google, against bookstores like Amazon.com, against the tele- phone companies who own the wires over which data is trans- mitted, against venture capitalists who fund companies which in turn support infringement, and even against the law firms who advise companies. Now, this is a problem for the same reason that violation of copyright law is a problem. We have got to have a balance between

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 23 copyright law and innovation. Grokster tries to distinguish good from bad, tries to strike that balance by saying we are going to create a legal tool that goes only after the bad and not a legal tool that goes after the good. Whether it succeeds or not, I think, remains to be seen. In my written testimony, I talk about some uncertainties relating to how the Court opinion will be interpreted. But because of those uncertainties, I think it may be premature to legislate to modify the opinion. Maybe Mr. Sherman is right and everything will be fine there. That doesn’t mean, however, that the problem is going to go away, either the problem of copyright infringement—as Senator Feinstein acknowledged, it is still with us in the digital environment—or the problem of threats to innovation. So what I want to suggest outside of Grokster are some things we might do, and also that we might not do, to address this problem. What might we do? The first thing we ought to do, I think, is make it easier to target the people who are actually infringing, not perhaps in a criminal environment, although that is possible. We don’t necessarily want to put college students in jail, though we have the legal tools now that would allow us to do that, and it would send a signal. I have proposed, along with Professor Tony Reese, a way of using the Copyright Office and the copyright royalty judges that this body created last year to try to create a cheap, easy mechanism for findings of infringement against direct infringers in ways that would impose a civil sanction that would hopefully make it clear to those people that they are infringing and deter them from doing so, and I have attached that proposal to my testimony. Second, I want to endorse Marybeth Peters’s statement that we have got to make it easier to clear digital rights. The problem with legal music services is not just that you can’t compete with free; it is that they have been so far unable to compete with ubiquity. People can get any song they want on an illegal service. They have not been so far able to get any song they want on a legal service, and that is because of the morass of rights that have to be cleared from multiple different owners in order to get rights in a digital environment. We have got to cut through that morass. Third, and finally, what I want to suggest is some things that we ought not to do, and in particular that we ought not try to impose technology mandates on innovative companies. Technology is good. It can be used for bad purposes, but if we give control over the design of a technology to one individual, history has shown us time and time again we will get bad innovation. Remember the pre-AT&T breakup phones. We got a lot of innovation in phone manufacturing once we let a whole bunch of people innovate in the phone industry. We didn’t have innovation before that time. Innovation by committee, innovation only at the suffer- ance of all copyright owners collectively, would be even worse. So what I want to suggest is that while this Committee should target acts of direct infringement, while the Grokster opinion does correctly target people who are engaged in acts of inducement, this Committee ought to be very careful to avoid targeting or giving copyright owners the tools to target legitimate technology compa-

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 24 nies, because those legitimate technology companies, as Mr. Sha- piro suggested, are existing right now in a state of fear. They have been sued. They recognize that they will be sued again and we shouldn’t make the problem worse for them. [The prepared statement of Mr. Lemley appears as a submission for the record.] Chairman SPECTER. Thank you very much, Professor Lemley. Our next witness is Mr. Ali Aydar, Chief Operating Officer for SNOCAP. Prior to joining SNOCAP, he was the Senior Director of Technology at the original Napster. He has a mathematics/computer degree with special concentration in technology-based entrepreneurship from Carnegie Mellon. We appreciate your being here and look forward to your testimony. STATEMENT OF ALI AYDAR, CHIEF OPERATING OFFICER, SNOCAP, INC., SAN FRANCISCO, CALIFORNIA Mr. AYDAR. Thank you, Mr. Chairman, Senator Feinstein, for the opportunity to be here this morning. My name is Ali Aydar and I am Chief Operating Officer of SNOCAP, a San Francisco-based company working to create a digital music marketplace that meets the needs of copyright owners, online retailers and consumers. SNOCAP’s founder, Shawn Fanning, is very sorry that illness prevents him from being here this morning. Six years ago, I joined Shawn as the first employee of an unknown music file-sharing service called Napster. Napster unleashed an appetite for digital music that no one knew existed. When I joined Napster, there were 40,000 registered users. When it shut down, there were 85 million. At its peak, Napster users were launching hundreds of thousands of searches every second. The day after the company shut down, Napster’s founders got together. We understood the problems facing digital music and felt compelled to fix them. We envisioned a technology-based solution built upon what we learned from our experience. We had learned that consumers want to listen to everything, not just the record companies’ active catalogs, but every song or symphony ever recorded. We had learned that it was not just about free; it was about access, having whatever music you want whenever and wherever you want it. Fans want music and they are willing to pay for it. Artists and rights-holders want and deserve to be compensated. There has been progress in meeting these challenges. Roughly two million tracks are available for sale and rights-holders are being compensated. Yet, still, consumers aren’t getting the music they want. Author- ized sellers offer far less than the over 25 million tracks that can be found on P2Ps. Because there are literally hundreds of thousands of copyright owners, in order to match the number of tracks that existing P2Ps provide, each online retailer would have to strike tens of thousands of deals—a legal, economic and practical impossibility. Consequently, retailers focus on what is considered most popular, making it unlikely for consumers to find everything they want on existing authorized services, whether it is an up-and-coming local

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 25 band or a classic radio hit from their youth. But where some saw only a legal and practical mess, we saw a technological opportunity and a market-based solution. SNOCAP is our effort to provide that solution, a business-to-business service that benefits rights-holders, online retailers, including legitimate P2Ps that respect copyright, and consumers. SNOCAP acts as a one-stop registry and clearinghouse. Copy- right owners register their content with SNOCAP and set the price in terms of distribution. SNOCAP also helps content owners identify less well-known tracks that are being shared on P2Ps and allows them to register and set terms on which these tracks can be shared or block sharing altogether. Retailers can access content through SNOCAP rather than negotiating hundreds or thousands of separate deals. It allows entrepreneurs to develop new business models and it gives thousands of online communities, whether they are maintained by non-profit organizations or giant corporations, the ability to form their own P2P networks and share content, while ensuring that rights-holders get paid. With SNOCAP, consumers legally get access to much more music and the benefits of file-sharing in an environment that works for everyone without the adware, spyware viruses and spoof files that plague the P2Ps today. This vision has been embraced by the industry. Major labels and many independents are currently registering their content with SNOCAP and progress continues. We expect that consumers will be able to buy music online from a SNOCAP-enabled retailer by early next year. It will be a dramatic step forward and it is just the beginning. SNOCAP has the potential to bring creators, retailers and consumers together as a registering and clearinghouse for every type of digital content, including film, television and books. As media and technology continue to mature, SNOCAP will enable rights- holders to efficiently move beyond the PC to new channels, allowing the Internet to finally realize its most fundamental promise— a medium where the world’s information, knowledge, art and science can be shared universally, immediately and legally. Thank you. [The prepared statement of Mr. Aydar appears as a submission for the record.] Chairman SPECTER. Thank you very much, Mr. Aydar. Our final witness is Mr. Sam Yagan, President of MetaMachine, and developer of the file-share application commonly known as e- Donkey. Prior to working there, he co-founded the educational publishing company SparkNotes, now known as Barnes and Noble. He has an applied math degree from Harvard and an MBA from Stan- ford. The floor is yours, Mr. Yagan. STATEMENT OF SAM YAGAN, PRESIDENT, METAMACHINE, INC., NEW YORK, NEW YORK Mr. YAGAN. Thank you, Chairman Specter, Senator Feinstein. Thank you for inviting me to testify on this issue that will undoubtedly have broad and lasting ramifications for both the content and technology industries.

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 26 For the last 3 years, I have served as President of MetaMachine, the developer and distributor of the peer-to-peer file-sharing application e-Donkey. From my vantage point, I have witnessed and participated on the front lines of the confrontation between content and technology. I hope my experience on this cutting edge will be valuable to your Committee. You might be curious to know what kind of person might run a peer-to-peer company, so I would like to tell you a little bit about myself. Prior to joining MetaMachine, I was co-founder and CEO of an educational publishing company called SparkNotes, which is now owned by Barnes and Noble. In that role, I was a rights-owner and my job was to sell books, not so different from the record la- bel’s job of selling CDs. I share this background with you to give you comfort that I am not an anarchist and I have no axe to grind with the owners of intellectual property. Before I get to the core of my opening statement, I would like to make it clear to the Committee that we have replied to the RIAA cease and desist letter and I have personally committed to Mr. Sherman, which I reiterate today, that we are in the process of complying with their request. Therefore, I am not here as an active participant in the future of P2P, but rather as one who has thrown in his towel, and I hope not to replay past issues today. I hope that as a result of my pending retirement from the P2P business, I can speak with more can- dor and that you will accept my testimony not as pushing any self- serving agenda, but merely as sharing with you my views on the post-Grokster world. I would like to comment on three elements of the Grokster case. First, because the Grokster standards require divining a company’s intent, the Court’s decision was essentially a call to litigate. This is critical because most start-up companies just don’t have very much money. Whereas I could have managed to pay for a summary judgment under Betamax, I simply couldn’t afford the protracted litigation I needed to prove my case in court under Grokster. With- out that financial ability, exiting the business was our only option, despite my confidence that we never induced infringement and that we would have prevailed under the Grokster standard. Second, the Court specifically cites that Grokster’s marketing to former Napster users indicated a principal, if not exclusive intent to bring about infringement. Is this really proof of intent to induce? Does that mean that every advertiser that is advertised in the e- Donkey software also have a similar intent to induce? I should hope not because last summer the campaigns of both President Bush and Senator Kerry ran advertisements on e-Donkey. Were they really both courting the swing infringement vote, or could they have had some other intent? My final point on Grokster is that its inducement standard is not sustainable as a long-term equilibrium. Imagine if since e-Donkey’s inception not only had we not made any statements inducing infringement, but that we had made no statements at all other than putting up a website that read ‘‘e-Donkey is a peer-to-peer file- sharing application.’’ Those words alone seem that they would not qualify as affirmatively and actively inducing infringement.

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 27 If we had never made any other statements, would we be in the clear right now? If so, new peer-to-peer applications will inevitably spring up and easily satisfy Grokster in this way. If we would not be in the clear, then the effect of Grokster will go far beyond merely chilling innovation; it will almost certainly freeze it in its tracks. I would like to wrap up by humbly stepping well beyond my area of expertise and making four observations that may be beneficial as you continue your oversight on this issue. First, I hope you will encourage a market solution. I don’t think anyone can predict how this will shake out, but I have limitless trust in our free market system to generate numerous new business models to take advantage of the tens of millions of Americans who use P2P. Imagine if we could monetize just 1 percent of the estimated tens of billions of shared files. There is a market solution to be found and it may well be one that fits into the business model of the incumbent entertainment industry, but it is not for us to decide. That is best left to the market. Second, on this issue I hope you will be especially aware of unin- tended consequences. With many P2P applications offshore or simply open-sourced, the entities that will end up being most dev- astated by Grokster will be those like us that set up shop in the U.S., abided by American laws, paid taxes, and at least in our case tried to license content from the entertainment industry. I fear that the winners in Grokster will not be the labels and the studios, but rather the offshore, underground rogue P2P developers who will have just lost half a dozen of their most legitimate competitors. Third, I hope you will consider the global context. As you know, e-Bay recently acquired the P2P company Skype for more than $2 billion. Skype was founded offshore, despite having American in- vestors. It would be a real tragedy and a blow to our economy if our future technologists follow suit. Finally, I have started a few companies in my career and if I have one overriding passion, it is for entrepreneurship, the driving force of our economy. I urge you to try to empathize with entrepreneurs trying to innovate in nascent industries. I hope you will do all that you can to nurture and encourage entrepreneurs, and provide them with a legal environment in which they can face the myriad challenges that startups do without the additional burden of having to wonder how a judge many years in the future will con- strue their every e-mail, every phone call, and indeed every thought. I am happy to take any questions. [The prepared statement of Mr. Yagan appears as a submission for the record.] Chairman SPECTER. Thank you very much, Mr. Yagan. Mr. Roe, Mr. Sherman, what remedies do you think can be im- plemented to protect property rights short of criminal prosecutions? I will start with you, Mr. Sherman. Mr. SHERMAN. At this point, we are not seeking any particular legislation with respect to the Grokster decision itself. Chairman SPECTER. I am not talking about legislation. I am talking about enforcement. How do we implement enforcement to protect property rights?

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Mr. SHERMAN. Well, there was some legislation pending in the last Congress that would have made it easier for the Department of Justice to enforce rights dealing with issues such as the number of files and the valuation of these kinds of files. That was not enacted, but that is the sort of thing that could be done that would make the job of the Department of Justice easier. The idea of giving the Justice Department an opportunity to bring civil actions I always thought was a very good idea because it meant that the punishment could be commensurate with the violation, so that it wasn’t a question of criminal prosecutions. Half or more of the lawyers in the Justice Department are on the civil side rather than on the criminal side, so it would mean that a lot more attorneys would be available to do something helpful on economic crimes. Chairman SPECTER. There is limited time, so let me move to Pro- fessor Lemley. Professor, you say that we ought not to stifle legitimate technology. And, Mr. Shapiro, you are worrying about chilling innovation. I will start with you, Professor. How do you identify the legitimate technologies and see to it that they are not harassed, while still protecting property interests? Mr. LEMLEY. Thank you, Mr. Chairman. Well, as Mr. Yagan indicated, the intent standard is a difficult one to meet. So I think the answer is a difficult one to understand; it is a difficult one to know whether you comply with it. So I think the answer has to have two parts. One is I would like to see both private and governmental enforcement focus its attention more closely on the people who are actually doing the infringing rather than companies that provide software or services that can be used to facilitate infringement. Tar- geting direct infringers, I think, is helpful because there we are not concerned about the impact on technology. The second thing that I think you can do is to have legal standards that are as clear as they can be and are as narrowly cir- cumscribed as they can possibly be to target only people in the secondary liability space that really are bad actors. That is hard to do, and I worry a little bit about how the Grokster opinion will be interpreted in the lower courts, but for now it might prove to be a workable standard. Chairman SPECTER. Mr. Shapiro, you articulate very important principles not to stifle technology or chill innovation. How do you accomplish that and still protect the property interests that Mr. Roe and Mr. Sherman are so concerned about? Mr. SHAPIRO. Mr. Chairman, I think you make it clear that there is a balance. Right now, I think I am with most of the other panel- ists and the prior ones that I would not encourage Congress to do much of anything. I think this case has to be sorted out a little bit. It set a very high bar. We are very concerned about the intent standard because— Chairman SPECTER. Congress should not do much of anything? Mr. SHAPIRO. On this specific issue right now. Chairman SPECTER. We are good at that. [Laughter.] Chairman SPECTER. Go ahead.

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Mr. SHAPIRO. But if Congress is to act in the copyright arena, I would have to say it has to also focus on what rights consumers have, not just the copyright owners. I would also redefine the Copy- right Office, frankly, so it is just not protecting copyright owners. I am concerned about making the U.S. Government the law firm for the RIAA and the MPAA. I don’t think that is appropriate, which some of the proposals have done. I think the term of copyright should be reduced. Actually, Congress did make a decision which helped the Supreme Court. Congress acted to make it clear that downloading in the home is an illegal activity, and because of that, the Supreme Court say that that is an illegal activity. There- fore, it is inducing this illegal activity. Also, the RIAA has sued some 10,000 Americans, some 10,000 teenagers, collected about $30 million to finance the RIAA, according to published reports. So what you have is— Chairman SPECTER. My time is almost up, but I want to— Mr. SHAPIRO. I am sorry. You have done a lot already is what I am saying. Chairman SPECTER. I want to move to Mr. Yagan. You heard Mr. Aydar’s suggestion to bring all of these competing forces together. Do you think it is a good idea? Mr. YAGAN. Mr. Chairman, I think my primary interest is in promoting as many different marketplace solutions as possible. So I am very excited about what SNOCAP is trying to do. I have been meeting with Mr. Aydar for well over a year on this topic. So I think it is a good idea, but I think we have to be very concerned not only about what we are doing internally, but how is the technology going to develop in an offshore environment. I believe that the result of the Grokster case will be that all of the existing peer-to-peer applications will be converted or in some other way will cease operations, but that does not mean that the file-sharing itself will necessarily stop. So I think as we think about what the market solution is or what the legislative solution is, we have to keep in mind the practical consequence that just because companies like mine may no longer exist, the technology still will. Chairman SPECTER. Thank you, Mr. Yagan. The red light went on during your answer, so I yield now to the new Ranking Member, Senator Feinstein. Mr. SHERMAN. Mr. Chairman, if I may just interject one thing, I just want to correct the record. There is no truth to the notion that the RIAA has collected anywhere near the amount of money Mr. Shapiro thinks. I just want to make that clear. Chairman SPECTER. Senator Feinstein. Senator FEINSTEIN. I have listened to this with great interest and the position I am having the hardest time understanding is yours, Mr. Shapiro. Mr. SHAPIRO. I suspected that. Senator FEINSTEIN. Yes, because you represent patent industries that want to protect their patents. In my book, there is no difference between the patent and the copyright. They are both pro- tective mechanisms for people who have created to be able to re- cover based on the creation. So in my view, what is sauce for the goose is sauce for the gander. So should we reduce patent?

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Mr. SHAPIRO. I would be very comfortable reducing copyright to the term of a patent, but now it is about five times the term of a patent. It used to be very close together, and Congress repeatedly expanded it at the request of copyright owners. It now is so ridicu- lously long that there is very little in the public domain that can be used in these new systems. Senator FEINSTEIN. But you certainly don’t want less patent- ability for the companies you represent. Mr. SHAPIRO. Well, we do represent most of the patent owners in the non-medical area, and there is no question about that. The patent law does have some challenges as well, but the difference in a patented product, a physical product, and a copyrighted product is that if I take your patented product from you, you no longer have that product. If I use your copyrighted product, you have not actually lost something physical. In fact, you may have gained something and I may want to buy more of your product. Senator FEINSTEIN. You lose your income. Mr. SHAPIRO. You lose a potential source of a sale. Every one of these estimates of lost sales actually may be an estimate of what was taken, but not paid for. A lot of these people would never pay for that, but there is some gain. They do get exposed to artists, they learn about artists. It is not all bad. It is arguable whether it is bad or good. It clearly is wrong. I would agree that P2P—I do not represent P2P companies. P2P is wrong. I am concerned about the broader context of that ruling in how all new technology is introduced because so much of new technology is shifting content around in time and space and managing it. Senator FEINSTEIN. Thank you. I was very interested in what Mr. Aydar said about SNOCAP. Now, that seems to me to be a very good model. Do you agree, Mr. Sherman? Mr. SHERMAN. Absolutely. The record companies and the rest of the music community are very excited about the offering. It is an entire system that can make P2P legal. It would allow non-infringing uses of it to continue, but it would enable you to identify infringing transmissions and turn them into legitimate sales with a back office function that provides royalty payments to everybody. That is a beautiful model. Senator FEINSTEIN. Well, then, Mr. Yagan, why wouldn’t we want to see the SNOCAP model become the state-of-the-art for the entire industry? It seems to me to be a fair outcome whereby everybody gets basically what they need to survive. Mr. YAGAN. I support that fully and I wish SNOCAP the best of luck, and we are in the process from an e-Donkey perspective of de- termining what our technological solution will be as we strive to convert the existing traffic we have into traffic that will be in one of these closed environments. At the end of the day, as much as I think it is a good idea and everyone else on this panel may think it is a good idea, it is at the end of the day up to the consumers, the 60, 70, 80 million consumers in America who are downplaying music on these P2P applications, whether they are going to leave the existing open environ-

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 31 ments and move over to a closed SNOCAP-type environment. I have no idea if that is going to take place in the market. Senator FEINSTEIN. I would just note that the solution comes from San Francisco. [Laughter.] Senator FEINSTEIN. Let me ask all of you, assuming that models like SNOCAP are the solution, what do we do to promote that solution? What is clear to me after so many years is just staying out of it and letting the two sides go at each other isn’t going to solve it, and the only thing that is going to happen is there is going to be a lot of litigation. So how would you suggest that the Congress or someone would proceed if, in fact, the SNOCAP model is a good solution? Mr. LEMLEY. Well, let me start off, Senator Feinstein, by sug- gesting that part of the difficulty that all of the peer-to-peer file- sharing services have had in negotiating for rights—and I think they have all tried to do so—is there are so many different rights- holders, not only because there are lots of different songwriters and there are lots of different recording companies and movie companies and they have each got rights, but because the rights have been divided according to a pre-digital world, so that one group of companies ends up with the rights to own publishing music and another group owns the rights to public performances of music And, of course, a digital broadcast is both. So we need some way, whether it is in Section 115 or some other way, to consolidate those interests so that there are a relatively small number of people who can sit down at the table and negotiate. Mr. SHERMAN. I would echo Professor Lemley’s remarks. Licens- ing reform in Section 115 would help especially the new business models where there are uncertainties about how the law applies. We don’t have dispute resolution mechanisms in place to solve those problems and get new, innovative ideas to market quickly. Senator FEINSTEIN. So let me ask this question. Is everybody agreed, then, that a solution lies within 115? Mr. SHERMAN. I certainly feel that way. Senator FEINSTEIN. Any dissenters? Oh, I knew it. Mr. SHAPIRO. Well, I just can’t say I agree with that, but what I would say is that part of the problem is the difficulty locating copyright owners. That is the biggest part of the problem, and part of it is because the copyright term is so gosh-darn long now. It is just impossible to use old stuff anymore. If there was a way of identifying copyright owners—and there have been proposals where you have to register with a dollar every 20 years or whatever it is just to say you are still alive. There are some proposals out there which are very reasonable and would allow a more central way of finding out who owns what. But a DVD shouldn’t cost the same price as a CD. The motion picture industry has done it right. The music industry has done it wrong, plus they have been saddled by all these different rights and who owns what. Mr. SHERMAN. The Section 115 reform that is being talked about would create a blanket license system so that a filing of a single

VerDate Nov 24 2008 09:03 Mar 04, 2009 Jkt 047297 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34113.TXT SJUD1 PsN: CMORC 32 paper would cover all of the copyright owners identified or uniden- tified, which would address Mr. Shapiro’s problem. Mr. ROE. If I could say one thing, just in the past 2 years just the education of informing people of what they were doing was illegal has actually deterred illegal downloading almost by 50 percent. So it has had some effect, the education, but I do have a little bit of issue with the fact that Congress shouldn’t do anything at this moment. I think in the early stages of any technology, whether it be the automobile or the recording business in general, there are times where we have to set the boundaries of how is this new technology going to be handled. And I hope that the information you have gathered here today will help you all do what you are supposed to do here. Chairman SPECTER. Thank you, Mr. Roe. Senator FEINSTEIN. Thank you. My time is expired. Chairman SPECTER. Mr. Aydar, you haven’t had a chance to comment. We would be pleased to hear from you, although SNOCAP has received lofty praise here. Mr. AYDAR. Well, in terms of legislation and whether Congress should do anything, SNOCAP is out there promoting a technology and a market-based solution. We believe that it would be helpful to see where that market-based solution leads us. We feel that we have built a solution that works within the copyright law and will make the number of works that are available on a legitimate service comparable to what is available on a peer-to-peer network, thereby making those services able to compete, thereby making those services compelling and capturing the users that are using these P2Ps today. Chairman SPECTER. Well, thank you all very much for coming in. I regret we do not have more members. You have come on a very, very busy day. We are on the floor with the Roberts nomination, which is occupying a great deal of attention. We had scheduled at the same time a conference on what to do about hurricane costs and offsets. So it is a very busy season. But there is a great deal of concern for both sides of this issue to promote artistic accomplishment and innovation on technology. The Internet has been magnificent, the artistic works have been magnificent, and these are issues of great importance on both sides to America and to the world. So we will continue to study them, and at least in the short term I think we will carry out the wishes of those who would like to see us do nothing, at which we are very good, until Senator Feinstein tells us precisely what to do. [Laughter.] Chairman SPECTER. Thank you all very much. [Whereupon, at 11:14 a.m., the Committee was adjourned.] [Questions and answers and submissions for the record follow.]

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